Serena Wu - IR Manager
Johnson Lau - CFO
John Banks - BNG Capital Management
SGOCO Group, Ltd. (SGOC) Q2 2013 Earnings Conference Call August 21, 2013 8:00 AM ET
Ladies and gentlemen, thank you for standing by. Welcome to the SGOCO Group Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time.
At this time, I would now like to turn the conference over to Serena Wu, Investor Relations for SGOCO. Please go ahead.
Thank you operator. Good morning, everyone and thank you for joining us on SGOCO’s second quarter 2013 earnings conference call. My name is Serena Wu, and I am the IR Manager of SGOCO Group. Also joining me on today’s call are Mr. Johnson Lau, CFO of SGOCO Group, and Mr. (Tony Zhao), Finance Manager of SGOCO Group.
Before we get started, I would like to remind everyone that this conference call may contain forward-looking statements, which are subject to risks and uncertainties. Our earnings release issued on August 20th and our SEC filings, including our most recent Annual Report contain additional information about factors that could cause actual results to differ from the management expectations. All amounts noted in this conference call are in U.S. dollars unless otherwise noted. The Company does not assume any obligation to update the information discussed in this conference call or in its filing.
Now, I would like to turn the call over to Mr. Johnson Lau, the CFO of the company.
Thank you, Serena, and hi everyone. We are very pleased to report our second quarter results as we showed a significant improvement in the various metrics over the quarter, most notably the revenue growth increasing 39% year-over-year; and our net earnings increasing 176% year-over-year.
Net margin for the second quarter increased 280 basis points from the same period of last year, driven by the continuous sales growth, and the positive results from our efforts to streamline our operational expenditures. The strategic sale of Honesty Group in November 2011 has afforded us the opportunity to build up our company in new and exciting directions.
Over the last year we have been focusing on four key paths for growth. Firstly on expanding our brand portfolio; second, to specialize in high-growth industries; third to diversify and refine our product lines, and fourth to continue expanding our distribution channels among the tier three and four cities in China.
I am pleased to report that the execution of these growth strategies is progressing well. First of all, on the brand portfolio, our goal is to leverage on our strong distribution network to tie-up top tier quality brands. We have identified few target brands and have been in talks with them. We believe that by adding one or two qualified high quality brands into our already strong brand portfolio we will be able to increase our overall brand awareness for SGOCO and our clients to capture additional market share in our target markets. More importantly our distributors in various provinces will be able to introduce more world class quality brands to the Chinese consumer.
Secondly on the industrial vertical focus, we have identified several industries that we believe have a huge growth potential in the coming five to 10 years; for example just like the budget hotel [trend] [ph]. Driven by the rising demand for domestic leisure travel, the market is estimating top budget hotel brands to open 200 and 400 hotels a year until year 2015 and we think that the smaller player in the tier three or four cities will also benefit from this trend and making their own expansion.
We are trying to align with these hotel [trends] [ph] and to [find] [ph] them with the tailor made display products for their [projected] [ph] size of the hotel rooms. These will bring us to our short focus strategy of advancing our portfolio on our product portfolio. Although the PC monitors remain our primary revenue contributor, we believe that our new focus in producing advanced smart display products and solutions is starting to pay off.
Earlier this year we have soft launched two new products to the market. Firstly the All-in-One PC which is touch screen, user friendly PC that is built in to a flat screen monitor, and also the Parts-in-One PC which is very similar to the All-in-One but has additional flexibility for the users to config and build their own PC system. The market feedback for the products are very good so far. Our distributor told us that they'd like the Parts-in-One PC a lot because it can act as a tool for them to upsell their other PC part products.
We've also seen opportunities to sell our All-in-One PC to the budget hotels because of its multi-functionality and its slim design. In view of the great market potential we anticipate these two products to be one of the key drivers for our revenue growth and the margin expansion in the second half of the year.
Lastly on our distribution channel from many established research I believe that the middle class growth will [inaudible] in tier three and four cities in China. We estimate that in year 2022 the proportion of Chinese middle class household in the smaller cities should reach more than 30%, up from the 15% in year 2002. We believe this growing middle class will pose a number of opportunities in trying to [inaudible] the distribution landscape.
At SCOGO, we have already laid the foundation for establishing distribution networks in the rural areas. Going forward, not only do we see the ample room to expand the tradition distribution network, we are also looking into emerging channels such as the e-commerce to capture the shift of the consumer behavior in the market. We believe this new channel are key to successful [build ups local and outsiders] [ph].
We are also very excited about our new sales operation that has been opened in Shenzhen to accommodate our sales expansion in China. Shenzhen is one of the most active and demanding cities for innovative electronic device and we have strategically placed some of the top [channels][ph] in the region to support this high growth area. Our Shenzhen [inaudible] team brings [solar light][ph] technology and channel [inaudible] to SGOCO and is dedicated to carry on SCOGO's growth strategies to transform our business from a traditional panel display [divider] [ph] and distributor to a smart value asset display solution provider.
We will continue to acquire and develop niche products such as our All-In-One or Parts-In-One PCs, to start deploying it at these high growth industries. We are also committed to further growing our revenue and profits through the expansion of a distribution channel and our brand portfolio. Our new Shenzhen sales operation and our continuous focus on the four key growth directions will ensure that SGOCO excels [inaudible] and grow and capture enormous business opportunities from a Chinese new rising of the income and the shifting urban landscape.
Now I will hand over the call to Serena who will walk you through the financial results on behalf of the management. Serena?
Thank you, Johnson. For the second quarter of 2013, our total revenue was $59.2 million, up 39% from $42.7 million from the second quarter of last year. The increase was mainly due to additional sales orders from a few local distributor clients and increased sales of flat panel monitors in the second quarter. As a revenue breakdown for the quarter, $41.3 million or 69.8% of total revenues were generated from SGOCO Brand and Licensed Brands product sales. This portion was previously known as SGOCO Brand. $17.1 million or 28.9% of total revenues were generated from key account sales which was previously known as non-SGOCO Brand and OEM. $0.8 million or 1.3% of total revenues were derived from the sales of other application products.
Gross profit for the second quarter increased 31.5% to $5.2 million from $4 million year-over-year. Gross margin for the quarter was 8.8%, as compared to 9.3% for the same quarter of last year. The decrease in gross margin was mainly due to withholding taxes paid to the Chinese authorities for recycling imported monitors starting in the second half of 2012. The margin decrease was offset by foreign exchange gains that we recognized due to RMB appreciation as we settle most of our purchases in U.S. dollars.
As a breakdown for our margin profile in the second quarter, SGOCO Brand and Licensed Brands had a gross margin of 9.6%. Key account sales had a gross margin of 8.2% and sales of other application products had a gross margin of 10.4%.
Selling expenses increased 140% year-over-year to $0.3 million from $0.1 million in the second quarter of 2012. The increase was mainly attributable to the increased transportation costs stemmed from increased product sales due to the second quarter as well as the increased staff cost due to additional employees hired in Shenzhen and Beijing offices to strengthen our sales team.
G&A expenses decreased 52.7% year-over-year to $0.8 million from $1.8 million for the second quarter of last year. The decrease of G&A expenses was due to tightened expenses control and a decrease in the professional fees upon the completion of the investigation in relation to the Company’s trading cost (ph) and the change of auditors in 2012.
Operating income for Q2 was $4.1 million, up 97% year over year from $3.1 million. Operating margin was 6.8%, improved from 4.8% in the second quarter of last year due to the increase of revenue and the reduction of G&A expenses. Net income for Q2 was $3.4 million, which grew a 176% from $1.2 million from Q2 of last year. The net income margin was 5.7%, up from 2.9% year over year. We reported earnings per share at $0.20 for the quarter as compared to the $0.07 year over year.
Moving to the balance sheet, as of June 30, 2013 the company held $14.2 million in cash and cash equivalents, as compared to $11.5 million at the end of 2012. As of June 30, 2013, our inventory increased to $16.4 million from $5.7 million at the end of 2012. The increase is to fulfill upcoming sales orders and expected market demand. As of June 30, 2013, we have working capital of $83.6 million with a current ratio of 2.56.
With that, I would like to conclude the management presentation and open up the floor for questions and answers. Operator, please?
Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions). The first question comes from [Savoy Lee from SH] [ph]. Please go ahead.
First of all, congratulations, the business in Q2 looks pretty good. The growth seems to come from key accounts, which was called OEM business before. Can you give me some more color going into second half on where do you see growth? What have you done and what’s your plan going forward to capture this growth?
First of all, I would like to spend some time to clarify on the new names of the product lines because we feel that’s more reflective of our current business. We have now separated our business into three main lines, namely the SGOCO Brand and Licensed Brands, the Key Accounts and also the Other Application Products. SGOCO Brand and Licensed Brands [inaudible] from the SGOCO Brand products, the Co-Brand products, they are now licensed products for the traditional distribution channel and e-commerce channel in the future. On the other hand, the Key Accounts [sales] [ph] from our old OEM business has new sales generated from our relationship with our key clients from the industrial end users such as fabrication, color [inaudible] and government industries.
Although it's a [fit] [ph] business was we believe our focus in developing applications, specific products for specific industries will bring us the increase in earnings through these business lines. Going to the second half of the year, that’s what I previously mentioned, SGOCO is going to focus on executing our four point strategies to expand our four highly [correlated yet] [ph] different direction to drive the growth.
First of all we are aggressively talking to more top tier brands to extend our brand portfolio. It will help us to sign-up more qualified and large distributors to expand our geographical reach. After that with the expanded geographical reach, it will help us to get more qualified brands to engage us as the distributor of co-brand with SGOCO, it will develop new products for our target customers in high growth industries.
Thirdly, we are also in talk with certain well known e-commerce platforms in China to expand our distribution capability, it will help us to reach more brand (inaudible) and get more revenues and also get some online revenues in a new section.
Lastly, we also have two new products, that’s what we previously said about the Parts-in-One and All-in-One PC. These two products will generate a higher margin than what our current monitor is and we believe that the flexibility of the Parts-in-One PC will give the market very good response on it. Our sales and marketing team is working very hard to help carry the official launch of these products for the targeted markets. We believe that we are in the right direction, right market and also targeting the right customers and getting the execution of the right strategies to capture the new business opportunities from our upcoming Chinese continually growing economy. We will definitely have the flexibility to adopt and to change and transform to fit in the ever changing consumer and customer trend. Did I answer your question?
The next question comes from John Banks from BNG Capital Management. Please go ahead.
John Banks - BNG Capital Management
Just a couple of questions. I am kind of new to the Company I started following it about six months ago. What’s the targeted margins or mix of products or I guess my question is can we move margins higher? That’s my first question.
Okay, well as you see from the industrial basis, if you are carrying on the traditional PC monitors, it’s pretty hard to move up the market just like other industrial players. That’s why we have been working very hard to expand our brand portfolio and also the product portfolio. We have newly introduced a product like the AIO the All-in-One and Parts-in-One PC we expect that that will have a much more higher margin, especially gross margin on what we previously have. And this is what we have been working very hard to get achieving.
John Banks - BNG Capital Management
And my second one, I know that David took a new position as COO. Can you elaborate what that new position means? Are you guys just focused mainly in China right now or are you looking to expand to North America or Europe?
As you see we set up the North American company last year, SGO Corporation. We will continue to commit ourselves to work in China obviously and also we will work on other markets like America and perhaps into Europe. But probably it will take some time. We will focus on both of them.
Well on the question [inaudible] David Xu who is the current COO, he continue to work with SGOCO to expand our business, that’s what his main role is.
The next question comes from [John Stone from Focus Capital] [ph]. Please go ahead.
You did like $1.2 in earnings in 2011. Do you think you can do like $0.80 in earnings now even with the new model in the next four quarters and do you think you can do $240 million in revenue over the next four quarters. So I was just wondering if you guys could see yourselves doing at least $0.80 and $240 million in sales in next 12 months.
First of all we don't generally give a guidance about our revenue and also our profit on that, but one thing I have to mention is back from year 2011 the business model is quite different from what we are right now. In year 2011 and before we have a manufacturing plants in South China which is very focused on the revenue making. So at this point of time the market differences is quite separate from what we are doing since we sell off the Honesty manufacturing plant in November year 2011.
Back from the previous quarter you can see that we have continued the focus to increase our revenue and also working sort of hard to increase our net profit from quarter-to-quarter. We believe that we will continue this effort and make it for the upcoming. I hope that would not be a dream.
(Operator Instructions). We have no questions at this time.
Okay. Well, thank you everyone for joining us on the conference call today. If you have any follow-up questions, please feel free to contact us by e-mail or by the phone number provided through our website at www.sgocogroup.com. We look forward to speaking with you again. Thank you and have a good day.
Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participating and you may now disconnect.